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Laying the Foundations 22-11-11

Laying the Foundations 22-11-11

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Published by Alex Marsh

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Published by: Alex Marsh on Nov 22, 2011
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1
Laying the foundations? The Government’s housing strategy
 
 Alex MarshSchool for Policy StudiesUniversity of Bristole: alex.marsh@bristol.ac.uk   22 November 2011
1. Introduction
 The much anticipated housing strategy for England
 – 
 – 
arrived this week. TheGovernment opens the document with the claim that
it is launching “a
radical and unashamedly 
ambitious strategy”. T
he strategy will
“get the housing market moving again”, while at the same time“laying the foundations for a more responsive, effective and stable housing market in the future”
.Government policy rarely emerges fully formed and unsullied by external influence, particularly whenlobbying by stakeholders and think tanks has become such an integral part of the Westminster policy process. It is possible to identify some of the apparent external influences upon this strategy 
 – 
where theGovernment appears to have imported ideas from this think tank or that lobby group. But it is not my aim here to do so systematically. Rather the aim is to review the key proposals in the document.
2. Preliminaries
It is good to see the Government recognising from the outset of the document the importance of housing to both economy and society. For too long housing policy has languished as something of apolicy backwater. And it is good to see that the Government appears to be willing to increase theamounts of money going into housing, compared to the settlement agreed earlier in its term of office. Wise spending in the housing field undoubtedly offers good value for money. The document offers a plausible portrait of the housing situation we find ourselves in. It captures the key dimensions of housing shortages and affordability problems. And some of the diagnosis offered is equally sensible. The Government recognises that the problems facing the housing market are not of recentorigin. Our housing problems are primarily the product of some longstanding failures. To take one
example, as the Prime Minister and Deputy Prime Minister observe in the foreword: “for decades in
Britain we have under-
built”.
 The document does not seek to place the blame simply on the recentfinancial crash or the current economic climate, although it recognises both that these developments have
exacerbated England‟s housing market problems and made the search for a remedy all the more urgent.
 The Government is promising to take
“a new approach”, which “marks a decisive break with the failedpolicies of the previous Government”.
 This seems questionable at two levels. First, while
I wouldn‟t seek to defend Labour‟
s housing track record, this is a bit of a cheap shot. Labour put quite a bit of effort into,for example, diagnosing the problems of housing supply, through the Barker and Callcutt reviews, forexample. The Labour record on net additions to the social housing stock was not great, but that was inpart because of the relatively high rate of demolitions of poor quality accommodation. The Coalition istrumpeting gross additions to the social housing stock at affordable rents, but that is before any impact of a reinvigorated Right to Buy, or the impact of the self-inflicted perverse incentives associated with thelocalisation of the HRA (see below). Labour had a poor record on regulating the mortgage market in a way that attenuated the magnitude of its cycles. But we are yet to see whether the Coaliti
on‟s will be any 
better.It is also the case that some of the deep presumptions underpinning housing policy, that have arguably contributed to current problems, are not questioned in this strategy document. Indeed, if anything they are reinforced. One example is the assumption that housing is the most appropriate vehicle through which households can and should accumulate wealth. Another might be that, while it is appropriate forgovernment to take a strongly managerialist stance towards the social housing sector, it is entirely 
 
2inappropriate to take a significantly more interventionist stance towards private landlordism or, indeed,towards the supply or demand for owner occupied properties.
If we think about housing policy through the lens of Peter Hall‟s
three levels of policy, the documentembodies changes of levels for existing policy instruments (level 1) and it proposes changes to theinstruments used (level 2). But it does not propose changes in terms of the underlying goals or aspirationsof policy (level 3). And one further preliminary observation is appropriate. While the document is shot through with level 1policy changes of various types, the direction of change is not always clear. So, for the sake of argument, when the Government states posi
tively that they are going to spend £Xmill in a particular area they don‟t
mention that the previous government
 was spending £4Xmill. So we‟re talk 
ing about a 75% cut inspending. That is understandable from a political perspective. It is also understandable in the broadercontext of fiscal consolidation. We could, after all, be looking at a 100% cut. But when we are seeking toassess whether the sorts of interventions proposed are going to address problems or are, in fact, likely tobe a step backwards in terms of support then this becomes significant.
3. Content
 The housing strategy comprises six sections covering: increasing supply; social housing reform; theprivate rented sector; empty homes; the quality of housing experience and support; and quality,sustainability and design.In terms of substance, much of the housing strategy document is, in fact, simply bringing together in oneplace a range of policies and initiatives that have already been announced. The proportion of its proposalsthat are genuinely new is relatively small. And it is hard to argue that placing this collection of proposalsbetween two covers transforms them into a coherent strategy. Some might argue that, on the contrary, itmakes it easier to see the gaps and the joins. The many of the initiatives and issues included in the document could be examined at length. Much of  what it covers can be summarised into a word: incentives. It is about curbing perverse incentives andcreating incentives to act in ways that further desired political and social objectives. If there is anything 
“radical and unashamedly ambitious” about the document it is the rejection of top
-down planning andthe belief that localising decision-
making will deliver better outcomes. But this isn‟t new, it is a theme
of 
the Coalition‟s thinking since the beginning. The contradictions between the document‟s claims that it isputting in place “long 
-term
strategic 
 
changes to the way in which we plan for housing” (emphasis added)
and the likely realities of localised decision making are not explored. And nor would you expect them tobe. The document presents some sensible, credible and welcome policies that are seeking to address issuesthat are widely recognised as problematic. But it has several more problematic aspects. And some of theproblematic aspects are given more prominence. Some of these problematic components of the housing agenda have already 
been discussed extensively. Indeed, I‟ve posted quite regular
ly on my blog aboutissues such as the affordable housing approach, changes to social housing tenure, the reform of the localhousing allowance, and the criminalisation of squatting. In the remainder of this document I want tofocus on some of the newer aspects of the agenda, while noting some of the better established issues inpassing.
4. Increasing housing supply
 The chapter on housing supply dominates the strategy document. It contains much of what could beclaimed to be new. And because this topic links most clearly to the broader economy and levels of macroeconomic activity it was always likely to be most newsworthy. The most high profile proposal is the Government
‟s intention to participate in a mortgage
indemnity scheme in order to allow first time buyers access to 95% mortgages for the purchase of a new build
 
3property 
. It is part of the Government‟s short term plan to “get the housing market moving”.
 And it
comes straight out of the CBI‟s proposals for the housing market, published a couple of weeks ago.
But what exactly is this trying to achieve? The superficial answer is that it will easy credit constraints uponfirst time buyers, who are struggling to meet the deposit requirements currently being imposed by lenders. Without a large deposit
, often via the „bank of mum and dad‟ (a phrase I am truly 
beginning to loathe),they are currently unable to access the home ownership sector. So, in theory, the guarantee scheme helps with access and affordability problems.However, this answer
shouldn‟t
really stand up to scrutiny. House prices are still substantially out of line with median earnings all over the country. In the press over the last day or so one of the credit rating agencies has pronounced that it considers housing in Britain still to be 25% overvalued.
It wouldn‟t
surprise me if that were an underestimate. So we could argue that what first time buyers really need isprice reductions, not assistance to pay prices that continue to be over-inflated. Particularly if there is a risk that interest rates will rise.However, allowing prices to fall further will impinge upon bank balance sheets and reduce the wealth of older home owners. The current estimate is that there are 800,000 households in negative equity 
 – 
whichlowers mobility rates. Allowing prices to drift downward would only make that worse. So the pricedeflation strategy 
 wouldn‟t play well with
some of 
the Government‟s key constituencies.
It wouldtherefore be politically unacceptable, even though it would be a better route forward the perspective of housing market efficiency. If the Government wanted to do something about access to mortgages, whilenot impeding market adjustment, it might have been better looking at helping households in negativeequity to move. But that would have required taking on liabilities now rather than later. It would also helphouseholds, but be of very limited benefit to the construction industry. What we get instead is a proposal that will reduce the incentives for banks to improve their risk management practices because the government is ultimately underwriting the debt. Admittedly, theoutline of the scheme suggests that the banks and the builders will have to take a hit first, but this policy establishes the principle that the government is the ultimate backstop for poor commercial decisions. Where have we heard that before? Not only in the UK banking crisis more broadly, but also in the USdebate over subprime lending and the process that brought Fannie Mae and Freddie Mac to their knees.It is a short term intervention that makes the longer term goal of an effective and stable housing marketharder to achieve. I think this is a bad move. If you were to take a Minskyian perspective on the creditcycle and considered that we are currently in the phase of collateralised lending following the ending of aeuphoric period then you would be even more concerned about this attempt to manipulate creditconditions.But might we be taking the proposal too seriously? A couple of things strike me. First, given the broadereconomic outlook, house prices continue to look fragile. The indemnity scheme is relatively small scale. Itis not, on its own, going to
prop up the market. Second, if the Government‟s reforms of the planning 
 system lead to the substantial increase in development it is promising then that will reduce upwardpressure on prices further. So it may be that some FTBs think twice about taking up this offer, as there isa significant risk it will mean negative equity in the very near future.
 This begs the question as to whether the Government‟s planning reforms will deliver more housing.
 Theproposed changes will no doubt boost profits for the speculative builders who were demanding them.But I am sceptical that they will necessarily increase the supply of good quality and sustainable homes greatly,although it would be good if they did. On the one hand, although the Government keeps referring to the
New Homes Bonus as offering “powerful” incentives, we‟ll have to wait and see
whether in practice they  will be sufficient to convince communities of the wisdom of development. On the other hand, supply is afunction of the broader economic context and confidence. Builders are sitting on plenty of development
land at the moment. It isn‟t only a shortage of land that is stopping them building.
 

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